If a franchisee wants to sell its business, it will usually negotiate an asset sale with the proposed buyer. The process is likely to include the following:
- Initial steps – the franchisee and proposed buyer may agree heads of terms, typically including confidentiality and exclusivity provisions, before negotiating a formal agreement. It is advisable to engage with the franchisor at an early stage, since the parties will need to obtain the franchisor’s consent to any sale.
- Due diligence – the proposed buyer will want to investigate the business, including its financial performance (actual trading accounts), customers, employees, lease and franchise agreement, before agreeing a purchase price. In addition the franchisor will want to undertake its own due diligence on the would-be buyer - to satisfy itself that they meet the standards required for the franchise.
- Tax – the selling franchisee should take advice on tax consequences before agreeing any sale.
- Franchisor’s right of first refusal – the franchise agreement may give the franchisor the right, if it so chooses, to buy the business itself for the agreed price. Alternatively, the franchisor may have a list of potential buyers (particularly where the business is part of a well-established franchise network). In those circumstances the franchisor will usually charge a fee for finding a buyer.
- Franchisor’s consent – the franchisor is also likely to have the right to consent to the proposed sale. Before giving consent, the franchisor will typically require that the selling franchisee has complied with the franchise agreement and that the proposed buyer meets the franchisor’s standards. The proposed buyer will also be required to enter into a new franchise agreement with the franchisor and usually undertake training. The costs of that training and the for the grant of the new franchise may well be a consideration when negotiating the sale premium.
- Other consents – the franchisee should check whether any other consents to the proposed sale are needed, for example from the landlord of the premises (if not the franchisor), any lender to the franchisee, or any regulatory bodies.
- Asset purchase agreement – the franchisor may have a standard template that should be used. The agreement should include a list of franchise business assets and the employees who will transfer to the buyer under the agreement. The franchisee should ensure that full disclosure is made against any warranties given. Alternatively, the transaction may be structured as a share sale, by which the buyer would buy all the shares in the franchisee entity under a share purchase agreement.
- Restrictive covenants – the franchise agreement may impose restrictions on the franchisee, preventing it from competing with the franchise for a certain period after any sale; the buyer may require similar covenants in the asset purchase agreement.
Transactions are flexible and there is no 'set procedure'. Early engagement with the franchisor is the key and can often lead to quicker and easier sales.